Pension scheme contribution hikes are an own goal for government

The news that modern universities, colleges and schools will face an unprecedented increase in employers’ pension contributions from September 2019 has alarmed many in the UK university sector.

If estimated projections are correct, the increase in England and Wales through the Teacher’s Pension Scheme will leave the 70 or so universities that gained title after 1992 looking at a recurrent cost increase of £130 million per year. 

That is equivalent to the student fees paid by 14,000 undergraduate students in England. The estimated additional cost for universities in Scotland is about £8 million per year, an increase of some 30 per cent. This 44 per cent rise in employer contributions for academic staff, such as that faced by organisations with staff in the TPS scheme, with no phasing in period, is unprecedented.

Other schemes involving universities will be affected by a hike in pension contribution rates, including the NHS scheme for clinical and allied health professional lecturers and the Local Government Scheme for Scotland. This comes soon after employers have faced recent increases in National Insurance contribution rates, the apprenticeship levy and the immigration skills charge. 

University leaders wish to see proper pension provision for their staff but without sustainability of resources these pension changes could generate unintended consequences that are sought by no one.

This is compounded by the extremely tight time frame (less than a year’s notice) in which these institutions will be forced to find the cash. 

Unlike the proposed USS pension changes, these are based on decisions taken by UK government ministers, not pension trustees. The Department for Education is offering one-off support for school and colleges in 2019-20 but it is proposing nothing to assist modern universities in these schemes. 

This defies common sense: transition funding should be offered equitably to colleges, schools and universities, because each is in some way obliged by law to offer public pension schemes to its staff. Like schools and colleges, universities receive much of their income through public funding and, since most of their tuition fees are fixed, they are prevented from mitigating against these cost increases. 

You might have thought that a well-designed approach to the UK’s biggest pension schemes would seek to avoid big cliff-face increases to either employers’ (or employees’) contributions. Employers highly value the contribution of their academic and non-academic staff and are willing to shoulder some additional burden of cost for the TPS. Yet the changes heralded by the government are one-sided – there is a huge hike in costs for employers yet no increase in co-investment for employees. At the same time, there may well be an increase in member benefits – benefits to future pensioners.

How did we end up with such a counter-intuitive set of changes, losing all notion of a sensible cost-sharing arrangement? Well, this is what parliament and the government need to look into urgently before the changes to the pension contribution rates are made. University employers are working through UCEA and organisations such as my own, MillionPlus, to ensure that the valuation is halted while these issues are properly worked through. We have this week called for the treasury select committee to look into this issue as part of an urgent parliamentary inquiry.

Signs that something significant has gone awry came when the chief secretary to the treasury openly implied doubt to parliament last month that these changes were in line with the government’s prior policy intentions. This being the case, the treasury and the Department for Education should listen to concerted voices from the university and college sector by pausing the valuation process and taking stock of the perverse outcomes that the Treasury’s pensions approach has generated.

It would be an understatement to say that these changes – coming against the roiling backdrop of our imminent departure from the EU and the Augar review of post-18 education and funding – creates a climate of uncertainty that could hinder the mission of our modern universities, which are vital anchors in their communities, innovating and delivering high-level skills for the workplace. 

Modern universities are the powerhouses of social mobility for many in socially excluded communities. Forcing them to divert investment from these critical agendas to address an irrationally large pension contribution hike seems like a major and avoidable own goal for the UK.

Greg Walker is chief executive of MillionPlus, the UK’s association for modern universities.